7/09/2009

ALL EYES ON ANKARA (Occhi puntati su Ankara)

Azerbaijan, once the cradle of Russia's fledgling oil industry, wants the best deal possible for the natural gas craved by European consumers keen to reduce their energy dependence on Moscow.

But Europe needs assurances that gas from below the Caspian Sea will flow through costly new pipelines. Resolving the political stalemate, including a key transit deal with Turkey, will determine when Azerbaijan can start pumping more gas. "We are increasingly seeing infrastructure projects that are driven by politics, not business," said Sveinung Dankel, Statoil Hydro Azerbaijan's lead negotiator for gas transportation.

"The Nabucco project is a case in point. Clearly an important link is missing: the sourcing of gas," he said.

Azerbaijan, which plans to produce 45 percent more gas by 2015, could potentially supply much of the gas to fill the Western-backed Nabucco pipeline, an alternative route for European consumers reliant on Russia for a quarter of their gas.

But Azerbaijan, which has yet to agree on the amount of gas Turkey would take from the pipeline, has other options. As well as other routes through the 'Southern Corridor' to Europe, Baku could also sell its gas to Russia, Georgia or Iran.

Azeri President Ilham Aliyev, addressing the 16th Caspian International Oil and Gas Conference in Baku this week, said the energy sector had become very politicised.

"If we are negotiating sales and purchase contracts, the price should be reasonable. If the issue of transit is on the table, we should also get a reasonable price," Aliyev said.

For Western producers and consumers alike, the delays are a cause for concern.

The second phase of the Shah Deniz field could potentially supply 16 billion cubic metres a year, half of Nabucco's planned capacity, but project leaders StatoilHydro and BP cannot commit to a start date until contracts are signed.

"First come the politics, then comes the industry. Set the framework and the industry will do the rest," said Robert Klein, managing director of the Trans Adriatic Pipeline, an alternative route to southern Europe.

"This is what politics can do: a clear statement in Azerbaijan that gas is flowing to Europe; a clear statement from Turkey about transit terms and conditions; a clear statement from the EU that it's bringing in gas from new resources in the Caspian region."

Azeri state energy firm Socar says gas production could rise to 34 billion cubic metres by 2015 from 23.4 bcm last year. Annual exports could exceed 30 bcm within 10 to 15 years, said Kristian Hausken, president of StatoilHydro Azerbaijan.

Europe will need to import between 400 and 450 bcm annually by 2020, up from 267 bcm in 2007, said Elio Ruggeri, business development director at Edison SpA and project director for another pipeline alternative, ITGI.

The Caspian region could supply about half of the additional volumes, he said, with Azerbaijan in pole position to start flows ahead of Turkmenistan and other Central Asian states.

Interest in Azeri gas, particularly from the second phase of Shah Deniz, is strong. Elshad Nasirov, vice-president for investment and marketing at Azeri state energy firm Socar, said Russia, Iran and Georgia had all offered to buy the field's gas.

"We will consider all proposals," Nasirov told Reuters. Socar is also a shareholder in Shah Deniz, as well as Russia's LUKOIL, France's Total and Iranian and Turkish state firms.

Observers say a transit deal between Azerbaijan and Turkey will play a large role in determining whether Azeri gas will flow into Nabucco or other European pipelines, or north into Russia -- an option the Shah Deniz partners have not discounted.

Turkish Energy Minister Taner Yildiz said this week Ankara had not given up its demand to take 15 percent of the gas to be carried by the Nabucco pipeline, either for domestic demand or for re-export. Azerbaijan has previously opposed such a plan.

"It's critical that Azerbaijan and Turkey reach an agreement on pricing and on transit in the near future that will give confidence to the project," said Richard Morningstar, the U.S. Secretary of State's Special Envoy for Eurasian Energy.

A partner in the Shah Deniz project, speaking on condition of anonymity, was more blunt: "If we don't reach agreement with Turkey, we'll sell to Russia."(Georgiandaily)